Financial startups and The new economy

Inventions are limited goods. This characteristics explained Jonathan Huebner physicist in Naval Air Warfare Center in his article from 2005 with name “A Possible Declining Trend in Worldwide Innovations”. Following article aims to show the trends in world and potential risks associated with them. I also would like to uncover a little why I think The new economy can change the game. This article beside explains IT trends in startups nowadays.

Silicon Valley is known as the best tech innovation center in world and it truly has a lot to offer for potential entrepreneurs. There are hundreds of eager investors and VC firms, excellent programmers, best managers and the weather is amazing as well. However the most of innovations that we are experiencing recently are aiming to IPO or to be bought by multinational companies rather than trying to add some value or come with something truly breath taking.

Jonathan Huebner said that the core inventions are like tree trunks and the innovations are like treetops. There is only a few tree trunks and they grow slowly. Tree trunk is the core of tree. Treetop varies a lot and contains great number of different tree branches. Google represents a tree trunk in real world . There’s thousands of apps and innovations which works with Google and create treetop.

Most of the startups are developing platforms rather than some cutting-edge technology. I believe the core of successful startup is not the platform which brings tiny innovation to thousand of people but the mechanism which change the game.

Recent development shows that the giant companies like Facebook or Amazon are willing to buy startups which enhance their activities, have a lot of users or threaten the company. That explains the effort of a lot of entrepeneruers which are relying on IPO or acquisitions. The internet allows building zero infrastructure businesses. This characteristics attracts potential entrepreneurs even more. It can be likened to 2002 when everything connected to internet was believed as “money making machine”. However offering ads and platforms with hundreds of users like SnapChat in times of crisis is as useful as smartphone without internet. The treetop can rapidly shrink when the economy is in troubles. However the the tree trunk is solid and holds even in times of crisis.

The additional value internet startups are creating is not as valuable as inventing cutting-edge nano material for mining industry because most of internet innovations are aiming to acquisition or IPO. Almost all tree trunks or core innovation and inventions were created on internet. Creating new cutting-edge innovation on internet is harder and harder. Lets take a look what are the main inventions and innovations in FinTech nowadays.

P2P lending

Lending club and its P2P principle for lending money is the best innovation I have seen so far in FinTech. The core of this innovation is surplus of money in economy which helps to establish platform where people lend and borrow money each other. The risk of default is divided among more people which supports financial stability of the entire economy. Only tiny percentage of mortgages and loans are executed. This innovation is crucial because it stabilizes the economy and offers interesting investment for those with money. The interest rates compare to banks are sometimes lower sometimes not. It depends on situations but the process is definitely much easier. Because these almost zero infrastructure platforms can significantly reduce expenses I believe it is the future of finance.

Blockchain

Blockchain is another huge financial innovation. Blockchain gives us ability to verify trust so we can build zero trust platforms. This was the missing piece for connecting finance to machines. Now we are able to verify trust by decentralized network. This can be useful in almost all areas where trust is required. The blockchain industry is fully developed. Startups which focus on building its own version of blockchain will only try to get in the trend. The core is done now comes the tiny improvements. This technology has great future when applying to connecting finance to machines.

Exchanging and sending money

Startups like TransferWise or Valuto are innovative too, but the innovation is less significant also there is huge risk of liquidity. Creating markets where people change money each other is very difficult task. There is significant risk of not finding opposite side for your trade. In the end these new markets can disappear as quickly as they rose.

Crowfunding

Crowdfunding is also not innovation. It is based on principle that charity has been using for ages except one tiny improvement. The donors can get something or the end product instead of only a good feeling. I personally see crowdfunding as one of the best way to gain audience or get information of how the audience likes coming product before the product is created. The risk associated with crowdfunding is again liquidity. Crowdfunding is basically button for pre order.

Building a platform or a platform?

Most of the startups aims to create platforms and hope to gain audience and grow ecosystem rapidly. Platform oriented to retail customers depends on users and their interaction with the site or with each other. It must create ecosystem and offer entertainment otherwise the platform dies as first in the series when crisis or stagnation hits the economy. Users are key and the biggest trouble in the same time. Platforms which offer the best entertainment win. Entertainment is a new key in 21st century.

When crisis hits economy or long-term stagnation occurs people get back to their true needs and stop using the platforms. It could happen vice versa and people can start using them even more. However the stagnation or crisis reduces the income and devalues the audience on platforms which indeed scrolls ads but the purchasing power of the audience is reduced. If this happens the platforms are for adds buyers worthless.

Platforms which focus on businesses are also first in row when there are troubles. When managers or entrepreneurs have to decide what expenses to cut in order to lower the budgets first in row they will choose nice gadgets like platforms. On the other hand if the platforms really helps in increasing the profits, managers can decide to fire an employee rather than interrupt paying the platforms.

The internet is crowded with platforms and open APIs. It reminds me investments schemes in late 20s and 30s when Ponziho systems were so popular. Ponzi system is system which aims to pay or reward current users by new users. The system needs all the time new customers or it fells down like card castle. Isn’t the social media and new platforms built on that principle? Get fans on Facebook, followers on Twitter, Google+ and Linkedin and use other less known platforms to attract new users which are doing the same. I am not sure, but if a significant crisis hits our world and lower the purchasing power of population the fact that the monthly fees will become high or majority of users will become less valuable for ads buyers can kill a lot of platforms

Evaluation

I believe in P2P lending due the scale of credit market. The market is so extensive that the problem of finding opposite side is very small. Platforms which are focusing on P2P lending can survive thanks to good risk management and scale of credit markets while P2P exchanging money can simply run out of new users or active users. The amount of people who send money abroad is smaller than the amount of people who are getting a loan or a mortgage. Somewhere in middle are P2P transfers and payments. The scale of market for P2P payments and transfers is almost as huge as market for mortgages and loans. On the other hand blockchains have been fully developed and major banks got into that. The core is done. This innovation was embraced by banks rather than startups and there is lack of space for coming platforms.

Where is The new economy?

The new economy is combination of blockchain technology and P2P finance. As I went thought book named “When the Money Runs Out” from Stephen D. King I realized that we must find new mechanism for funding our science and our future. So what is The new economy? It is mathematical mechanism and strategy game in the same time. It uses finance as a source of wealth and it distributes the wealth to the science which supports valuable innovations and inventions. It is protocol for sustainable economy development which can be run at the same time as traditional capitalism.

OK, so what is Aaelnor? It is the name of the projects. The mathematical mechanism is being developed for about an year all by myself and the development will continue. I am trying to solve the problem of full automations. If machines can done 90% of humans work by 2070 where will appear the purchasing power for buying the products from machines? I am looking for an answer. The core of P2P economy is its efficiency. The disruption and lowering fees is only side effect. The protocol itself use P2P economy a lot.